The morning afterMarkets struggle to make sense of Britain’s election chaos

THERESA MAY decided to call a snap election on a walking holiday in Wales. History will regard it as the most disastrous ramble since Captain Oates wandered out of the Antarctic tent in 1912. Having failed to anticipate the result, investors (like everybody else) are struggling to understand what will happen next.

It looks as if the Conservatives can carry on in power, with the support of the Democratic Unionists in Northern Ireland. This would give them a bare majority. But Mrs May’s position has been severely weakened ahead of Brexit negotiations. Another election later this year is possible.

For the markets, two factors are offsetting each other. On the one hand, there is uncertainty and the possibility that a left-wing Corbyn government could still take power in the near future. On the other hand, this result may change calculations about a hard Brexit. The Unionists backed Brexit but they will not want a hard border with the rest of Ireland; something that may require Britain to make concessions to the EU. Azad Zangana of Schroders, a fund management group, said

As for Brexit, serious damage has been done to the UK’s negotiating position. Without a strong mandate, Europe can ignore the UK’s demands. Even the UK’s threat to pull out of negotiations will now appear hollow and lacking the support of the British public

Sterling took the first hit. The pound was $1.2950 against the dollar just before the result, while the euro was worth £0.866. As the markets opened this morning, the pound had dropped below $1.27 while the euro was worth more than £0.88.

A weaker pound means that the earnings of multinationals in the FTSE 100 index will rise in sterling terms. As a result, the FTSE 100 tends to rise when sterling falls; that is what happened after the referendum in June 2016; after 20 minutes, the FTSE 100 was up 70 points or around 1%. But the domestic stocks in the FTSE 250 headed the other way, dropping 95 points, or 0.5%. Caroline Simmons of UBS Wealth Management warned that

should the market focus on concerns that a Conservative minority won't last and that we may ultimately end up with a Labour-led parliament, then the currency-related boost will likely be offset by concerns over the potential for increased corporate tax rates and nationalizations of certain industries.

Ten-year gilt yields rose slightly from 1.03% to 1.06%. A weak government would be unlikely to pursue a tight fiscal stance, meaning more gilt issuance.

The momentum of UK economic growth has been fading as we move through 2017. Retail sales growth, house prices and inflation adjusted incomes are all weakening in what remains a very consumption driven economy. This election result and the continued uncertainty it brings suggests that this trend continues.

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